As the new government takes shape, among its initial key focus areas are likely to be revival of economic growth, repair of the financial sector, pursuit of direct tax and labour market reforms.
The next phase of reforms roadmap is expected in the backdrop of a cyclical downturn. Gross Domestic Product (GDP) growth figures for January-March, to be released on May 31, are expected to depict a loss of momentum in India’s growth.
A downward slide has already been seen in Index of Industrial Production (IIP), which contracted to a 21-month low of 0.1 per cent in March on the back of weak investment and consumption demand. For the 2018-19 financial year as a whole, IIP growth stood at 3.6 per cent, much lower than 4.4 per cent recorded in previous financial year.
India’s slowing consumption story and subdued growth in exports are factors which are expected to keep the country’s growth rate under pressure in the months to come. While the automobile sector has been witnessing a subdued growth and the passenger car segment saw a decline of 16 per cent in the month of April 2019, the FMCG sector has also been seeing a slowdown in volume growth.
“The economy is going through a cyclical downturn. The GDP growth in the second half of 2018-19 had fallen to around 6.5 per cent — below the trend rate of growth of India (7 per cent). Consumption demand, which was the bulwark of the economy, has weakened and private investment is yet to show signs of a pickup,” rating agency Crisil said in a note Thursday, while suggesting a number of measures to support growth for the new government.
Apart from measures from the Reserve Bank of India, a key element in the growth revival process will be speeding up bad loan resolution process under the Insolvency and Bankruptcy Code (IBC), which will free up resources for banks to lend further. Addressing liquidity issues of the Non Banking Financial Companies’ sector is expected to be another priority, as crisis in the NBFC sector threatens to engulf the entire financial sector.
A number of NBFCs has put a stop to fresh loan disbursements while many are on the verge of defaulting on their repayments. The government is also expected to further step up capital infusion in public sector banks and pursue consolidation by merging weak banks with strong banks.
Economists and market experts say that while the NBFC sector is choked for funds, their revival is critical for the economy as they account for a large part of credit disbursal in tier II and tier III towns.
Besides, while the infrastructure segment has seen a pick up in credit demand over the last one year and additional credit to the segment rose by 1.65 lakh crore or 18.5 per cent in FY19, the credit growth for the industrial segment continues to remain weak. There is a sense in the market that the private sector investment needs to revive as it may provide the necessary leg up to the economy. The overall credit demand for the industry went up by only 6.9 per cent in FY19 despite a strong demand from infrastructure segment.
The IBC has been the most significant financial sector reform launched by the NDA government, aimed at speedy resolution of stressed assets of more than Rs 10 lakh crore. While a recovery rate of around 43 per cent points to early success of the law, delays in successful resolution in nearly 48 per cent of the cases has been its main hurdle. The IBC requires a corporate insolvency resolution process (CIRP) to be completed in 180 days, which can be extended by another 90 days to a maximum of 270 days. These time limits have been set to ensure that recovery of non- performing assets (NPAs) in a time-bound manner.
But, according to data from the Insolvency and Bankruptcy Board of India, as on March 31, 2019, out of total 1,143 that were undergoing resolution under the IBC, a total of 548 cases exceeded the 180-day deadline. This reflects that in nearly 48 per cent of the cases (or 548 CIRPs), resolution could not be achieved within 180 days. A total of 362 cases — or 31.67 per cent of the ongoing CIRPs — surpassed the outer limit of 270 days set out in the IBC. Ensuring that time lines set out in the law are adhered to is crucial for timely recovery of the loans, which will boost capital available, helping improve credit availability and supporting growth.
Post poll, the government expenditure would require a commensurate growth in revenue collections, an area where the government struggled in the previous financial year. Both direct tax revenue and Goods and Services Tax (GST) revenue have fallen short of the revised budget estimates for 2018-19 by at least Rs 1 lakh crore. Going ahead, meeting the already declared direct tax targets for this financial year is going to be a slippery slope, which could prompt the tax department to scale down its targets in the full Budget for 2019-20 expected to be presented by the new government in mid-July.
On the GST front, no major rejig of tax rates, barring few minor items where there could be some discrepancy, is in the offing. The focus for this financial year is expected to be more on boosting compliance, simplifying procedures and perhaps a move towards inclusion of some of the items that are currently out of GST’s ambit such as natural gas and aviation turbine fuel. A dedicated focus on compliance and maintaining rates is being seen necessary for protecting the gross GST revenue target which may falter given the steep monthly aim of Rs 1.15 lakh crore.
Labour reforms did not complete the course mapped out by the government in its first term. In his independence day speech in August 2015, Prime Minister Narendra Modi had spoken about codification of labour laws into four codes.
The labour and employment ministry had drafted four labour codes: industrial relations, wages, social security and welfare, and occupational safety, health and working conditions by amalgamating, simplifying and rationalising the relevant provisions of the existing 44 central labour laws, yet not even a single code got enacted through the legislative route. Employment generation, especially of good quality and with decent wages, would be crucial, especially in absence of a strong economic growth.
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